Commercial Real Estate Cost Segregation

The Ivy Group - Cost SegregationWhat is Cost Segregation?
Cost segregation is a front loaded depreciation technique employed by property owners and investors to accelerate their tax savings. Real estate property owners who own a business or rental property benefit most from cost segregation.

How Does Cost Segregation Work? How Does Cost Segregation Work?
Cost segregation works by reclassifying certain improvements into shorter recovery period for tax write offs.

A cost segregation study is normally performed by an engineering consultant that separates improvements from the actual property itself, thereby reducing the recovery period, for example, from 39 years for a commercial property to a shorter recovery period. The following are typical recovery periods for various improvements:

DESCRIPTION RECOVERY PERIOD EXAMPLE OF IMPROVEMENTS
Personal Property 5-7 years
Power Generators, HVAC, cabinets, window treatments, etc.
Land Improvements 15 years
Sidewalks, fences, parking lots, etc.
Residential Building 27.5 years

Single family homes, townhomes, condo, apartments, etc.
Commercial Building 39 years
Office, retail, industrial warehouse, medical, hotel, etc.
Land Not depreciable

Land is not depreciable.

What Are the Advantages of Cost Segregation? What Are the Advantages and Disadvantages of Cost Segregation?

ADVANTAGES DISADVANTAGES
Tax savingsTax savings Cost of engineering study can be highCost of engineering study can be high
Write off of tax basis when component is replaced or damagedWrite off of tax basis when component is replaced or damaged Tax code recapture provisions when the property is soldTax code recapture provisions when the property is sold
Cost of engineering analysis for business entity is deductible as business expenseCost of engineering analysis for business entity is deductible as business expense Penalties for tax payers that understate cost segregation too aggressivelyPenalties for tax payers that understate cost segregation too aggressively
Potential lower annual real estate taxesPotential lower annual real estate taxes
Potential lower local transfer taxesPotential lower local transfer taxes


What Are Some of the Areas Cost Segregation Apply To?What Are Some of the Areas Cost Segregation Apply To?

COST SEGREGATION APPLICATION AREAS
New ConstructionNew Construction
Existing StructureExisting Structure
RenovationRenovation
RemodelingRemodeling
RestorationRestoration
ExpansionExpansion
Property placed in business several years agoProperty placed in business several years ago
Each property owner can have a separate cost segregation studyEach property owner can have a separate cost segregation study


How Do I Get Started With Cost Segregation? How Do I Get Started With Cost Segregation?

STEP PROCEDURE
1 Contact a CPA to understand the ramifications of the tax sequences. A good CPA will provide planning and projections on potential tax savings based on a particular tax situation.
2 Hire a certified and qualified engineering consultant to conduct cost benefit analysis.
3 Have CPA collaborate with engineering consultant to provide evaluation on engineering study methodologies to minimize IRA challenges.
4 Contact The Ivy Group and we will provide you with experienced CPAs and engineering consultants.


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